China is Becoming More and More Influential to Global Energy Market

By IBT Staff Reporter On 06/11/10 AT 8:18 AM

Crude oil price pares earlier gains as investors used slowdown in industrial production growth as an excuse to take profits. Currently trading at 74.9, the front-month contract for WTI crude oil slips -0.77% from yesterday's close. The contract had risen over the past 3 days, gaining more than +5%. Brent crude remains firm after the benchmark contract soaring to 77.08 earlier.

The Chinese released a set of strong macroeconomic data for May. Headline inflation surged to a 19-month high at +3.1% y/y, up from +2.8% in April, as driven by food price which jumped +6.6% y/y and contributed +2% to headline CPI. The government expects further overshooting above the +3% target is likely in June and July but inflation should peak soon.

Industrial production growth slowed to +16.5% y/y in May from +17.8% in April. Indeed the +16.5% growth is very strong when compared with historical average of +13%. The market probably was disappointed by deceleration in growth of heavy industry (17.8% from 19.1%).

According to BP's Statistical Review of World Energy June 2010 released on Wednesday, global oil demand plummeted -1.7% y/y to 84.077M bpd in 2009, the sharpest decline since 1982. OECD oil consumption dropped -4.8% but was partly offset by +2.8% increase in non-OECD demand with China, India and Middle Eastern countries accounting for all of the non-OECD growth. Primary energy consumption plunged -1.1% y/y in 2009, the first annual decline since 1982. Consumption from OECD economies slumped -5% but was partly offset by +2.7% surge in non-OECD demand. Asian Pacific was the region recording the strongest growth, driven by China and India. Indeed, without the contribution of China (+8.7%) and India (+6.6%), non OECD demand would have dropped -1.5%, exacerbating annual contraction!

Apart from oil, China's influence has been strong in other areas of the energy sector. Global coal consumption was flat last year as growth in China (+9.6%) and India (+6.8%) managed to compensate the over -10% decline in OECD demand. Natural gas consumption was hit hard with contraction of -2.1% recorded despite huge expansion in China (+9.4%) and India (+25.9%) given natural gas consumption only takes up a small portion in the energy structure in these 2 countries. The growth engine has clearly shifted from the west to the east in recent years.

Comex gold recovers after sliding to as low as 1218.1 earlier in the day. Near-term outlook remains soft for the yellow metal as investors, with risk appetite improved, seek higher return investments such as stock markets. In Asia, stocks rose for the second day with the MSCI Asia Pacific Index soaring +1.3%. In Europe, major benchmark indices edge higher despite disappointing British manufacturing data. UK's industrial production slipped -0.4% m/m in April, compared with market expectations of a +0.4% gain while manufacturing production also dipped -0.4% in April following a downward revision to -0.4% (from +2.3%) in the prior month.

In NY session, focus will be on retail sales, which probably grew +0.2% m/m in May, and University of Michigan Confidence index, which is expected to have improved to 75 in June from 73.6 a month ago.